Invoice factoring, also known as accounts receivable factoring, is a financial arrangement where a company sells its outstanding invoices, or accounts receivable, to a third-party funding source called a factor. The factor purchases these invoices at a discounted rate, providing instant cash to the company. Instead of waiting for customers to settle their invoices according to their regular payment terms, the company receives a percentage of the invoice value upfront.

Once the invoice is acquired by the factoring company, they take over the responsibility of collecting payment from the customer on the invoice’s due date. When the customer pays the invoice, the factoring company releases the remaining balance back to the business after deducting their fees and charges.

Invoice factoring serves as a means to quickly enhance cash flow for businesses awaiting payment on outstanding invoices. It proves especially valuable for businesses with extended payment cycles, such as staffing agencies or other service-based companies, which need to compensate their employees or suppliers while waiting for clients to clear their invoices.

By adopting invoice factoring, oil and gas companies can bridge cash flow gaps resulting from prolonged payment cycles and access working capital promptly. This financing option offers an alternative to conventional bank loans or lines of credit since factoring decisions primarily depend on the creditworthiness of the company’s customers, rather than the company’s credit history or collateral. As a result, invoice factoring becomes a viable funding choice for businesses with limited credit or a relatively short operating history.